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Original illustration by Tse Yuet Ching. 

09:42 am | 26. May 2020

Stuck in the Middle

Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

By Isabel Hilton

Given the prolonged political nervous breakdown that the UK was experiencing even before COVID-19, it should come as no surprise that there are unanswered questions around the country’s current and future foreign policy. The prime minister came to power on the promise that Britain would escape the constraints of the European Union, consistently presented as bonds to be broken. That, he assured the electorate, would allow the UK to bestride the globe as an independent nation, free to conduct its own business according to its own interests and desires.

Among the promises dangled in front of the voters were two key future trading relationships — one with the United States, the other with China. One is still the world’s largest economy and historically the UK’s close strategic ally, the other the world’s second largest economy, with which the UK’s past relationships have been more complicated. The optimistic Brexiteer narrative favoured the promise of a flourishing trade with both that might somehow compensate for any losses in trade and investment caused by leaving Britain’s closest and largest trading relationship. 

There is, of course, another way of looking at it: that by leaving an entity that was able to use its collective strength to defend member state interests, the United Kingdom has weakened its influence and its capacity to bargain. Furthermore, it has done so just as the two major powers on which its big bet was focused have entered a period of intense and increasingly hostile strategic competition. As it seeks to strike new relationships with both China and the United States, the UK is at risk of being able to please neither. As things stand, both are likely to seek to insist on preferential loyalty in exchange for favourable terms of trade and investment. Neither will happily brook an attachment to its rival.

The old certainties that have defined each relationship for decades are no longer reliable. British governments and the more traditionally minded British press are fond of invoking the “special relationship” between the USA and the UK as the unshakeable foundation of Britain’s claim to global status. Whilst there has certainly been a deep strategic foundation of shared intelligence and military dependence since WW2, it is unclear how much the current US president continues to value it. There is no evidence either that he plans to except the UK from his general insistence that relationships with smaller, weaker countries must serve the US interest, regardless of any third party conflicts that may be provoked. As the UK sails into these unknown waters with few reliable navigational aids and no fixed destination, some sections of British opinion regard China as a dangerous navigational hazard, while others still see it as the Promised Land.

It is clear that United Kingdom urgently needs a new foreign policy. The UK’s current goals for its relationship with China remain focused on reaching better terms for trade and investment, while its capacity to achieve these goals is diminished. At the same time, it is increasingly evident that geo-political complications have real consequences and cannot be ignored. Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

 

The UK’s current intention is to leave the Single Market by December 2020 in order to be free to diverge from EU norms. This, in turn, leaves open a number of China-related questions. Will the UK continue to support the EU contention that Chinese state aid to its national champions distorts the terms of trade, to the detriment of its trading relationships? Will the UK be obliged to concede China’s long-held wish to be acknowledged as a market economy, despite the many distortions in China’s economy designed to favour its own firms as the price of advances in trade and investment conditions? And if it does, how will that affect negotiations with the United States, given the US stated intention to insert the equivalent of Article 32.10 of the USCMA – the Nafta clause dealing with agreements made with non-market economies – into all future trade agreements?  

What view will the UK take of incoming Chinese foreign direct investment (FDI)? The UK has traditionally been among the world’s most open economies, but has not been immune from the EU’s wider concerns about predatory Chinese acquisition of advanced technologies. Now that these debates are visible at a national level, will the UK government be obliged to take a more defensive position over technology acquisitions? The UK will inevitably be handicapped in these reflections by the realities of scale. It is a market of some 60 million people. The EU is a market of 350 million consumers. There seems little reason to believe that China will grant special concessions to the UK that it would not grant to the US or the EU.

Imbalances and Gaps

There is certainly room for improvement in the UK’s economic relationship with China. Despite many trade missions and much positive spin, UK trade with China is both relatively small and heavily balanced in China’s favour. According to a February 2019 British Parliament research briefing, UK exports to China in 2017 were worth £22.3 billion, an eightfold increase over two decades; imports from China were £45.2 billion, representing a 10 fold increase in the same period, resulting in a trade deficit of -£22.9 billion. Overall, China accounted for just 3.6 percent of UK exports and 7.0 percent of all UK imports.

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There are structural explanations for the trade imbalance: the UK has de-industrialised in favour of an economy heavily based on services, so in China’s industrial phase the UK had little to offer, unlike Germany which enjoys more balanced trade with China. The UK hoped for a future growth in services that would play to its strengths. But, although Britain has a small surplus with China on trade in services, trade in services remains under-developed: China accounted for only 1.2 per cent of the UK’s global export of services in 2018, and much of that was accounted for by Chinese students in UK universities

 To put these figures in perspective, the EU in 2018 accounted for 49.3 per cent of UK two-way trade, the United States for 14.6 per cent and China 5.3 per cent. Given the size of the Chinese economy, this can only be regarded as modest.

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The gap between promise and reality has been a feature of the UK-China story for decades, despite a reasonably sustained investment in the political relationship. Britain recognised the PRC in January 1950, but relations dipped in the Cultural Revolution when PRC fomented riots against British colonial rule in Hong Kong and a Chinese mob attacked the British legation in Beijing. Things improved in 1972 when the Conservative prime minister Edward Heath upgraded the relationship to full diplomatic relations. When Heath visited China in 1974, he was already out of office, but Beijing gave him a big welcome nevertheless, in recognition of his role in restoring the damaged diplomatic relationship. 

Under Heath’s successor, Margaret Thatcher, the UK and China negotiated the conditions under which Hong Kong would return to Chinese rule on the expiry of the New Territories lease in 1997.  Despite Beijing’s steadily tightening grip on the former colony since the handover, the UK government has done little to defend the terms of that agreement. This passivity has been noted by many analysts as one of several signs that Britain is willing to sacrifice human rights to the promise of China business. It remains to be seen if China’s most recent move – to impose a security law on Hong Kong changes that equation.

Today, despite repeated calls for a strategic vision, the UK lacks a strategic approach to China and relations have been determined primarily by varying levels of caution or enthusiasm in successive British administrations. 

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Deng Xiaoping and Margaret Thatcher meet on September 24, 1984, to discuss the future of Hong Kong. Image by Brücke-0steuropa available at Wikimedia Commons under CC license.

 Among the more memorable approaches was that of the former Prime Minister David Cameron and his Chancellor of the Exchequer (finance minister), George Osborne.  Cameron had been prime minister for two years when Xi Jinping came to power, but in May 2012, the UK-China relationship suffered a major reverse when Cameron held a meeting with the Dalai Lama, who was visiting Britain to receive the Templeton Prize. The meeting, held in the environs of St Paul’s Cathedral rather than on the government estate, was nevertheless fiercely criticised by Chinese officials and state media in familiar terms: a foreign ministry spokesman said the UK had "[hurt] the feelings of the Chinese people", meddled in China's affairs and harmed Chinese-British relations. On a more practical level, a visit from senior official Wu Banguo was abruptly cancelled and reciprocal visits were frozen. 

Today, despite repeated calls for a strategic vision, the UK lacks a strategic approach to China and relations have been determined primarily by varying levels of caution or enthusiasm in successive British administrations.

 

The political chill had no perceptible impact on trade, but it did affect the view of the Cameron government on the desirability of maintaining a public commitment to human rights and cause of the Tibetans. In truth the breach was relatively short-lived. There had been a high profile UK trade visit to China in 2010, reciprocated in 2011, and by 2013 and 2014, the exchange of trade visits had resumed.

In June 2014, the Chinese prime minister Li Keqiang visited London and signed two significant agreements: one on Chinese investment in nuclear power in the UK and the other on Chinese involvement in building and operating high-speed rail. China had been offered the opportunity to take a decisive stake in Britain's energy and transport infrastructure. The strategic implications of this decision would come back to haunt subsequent British governments. 

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Li Keqiang, then vice-premier of the State Council, during a trade visit to the UK in 2011. Image by Foreign & Commonwealth Office posted to Flickr.com under CC license.

The agreements were among trade deals worth £14 billion and were accompanied by lavish praise from Cameron, who called the rise of China a defining event of the 21st century. The nuclear deal was described as part of an overall agreement to tackle climate change. China and Britain also signed a joint statement on climate change.

In May of the following year, 2015, China unveiled its ambitious bid for global technological leadership in "Made in China 2025. The ten-year plan aimed to transform China into a leading manufacturing power by 2049, the highly symbolic centenary year of the People's Republic of China. It focused on nine key areas: improving manufacturing innovation, integrating technology and industry, strengthening the industrial base, fostering Chinese brands, enforcing green manufacturing, promoting breakthroughs in 10 key sectors, advancing restructuring of the manufacturing sector, promoting service-oriented manufacturing and manufacturing-related service industries, and internationalising manufacturing.

The 10 key sectors were new information technology, numerical control tools and robotics, aerospace equipment, ocean engineering equipment and high-tech ships, railway equipment, energy saving and new energy vehicles, power equipment, new materials, medicine and medical devices, and agricultural machinery. The plan was to be supported by policies to deepen institutional reforms and strengthen financial support. It was a plan that was to ring alarm bells in Western capitals, already uneasy about Chinese acquisition of high-tech companies and concerned about continuing industrial espionage and charges of IP theft.

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George Osborne, the UK’s finance minister, with Chinese Vice-Premier Wang Qishan in 2011. Image by Foreign & Commonwealth Office posted to Flickr.com under CC license.

For the Cameron government, however, the China relationship offered opportunity, regardless of the compromises that China demanded and the UK seemed eager to please, even in some extremely sensitive areas. In September 2015, for example, one year after the Uighur public intellectual Ilham Tohti was jailed for life, George Osborne, the UK’s finance minister, led a trade delegation to China. It included a stop in Xinjiang, where Osborne, the first Western official to visit the region, spoke only of business. It was a major propaganda coup for China and earned him lavish praise in the normally hostile nationalist newspaper, the Global Times.

It was a worrying signal for those who also perceived risks in the China relationship. Osborne’s enthusiasm, however, was undiminished. Speaking at the Shanghai stock exchange during the same trip, he made a resounding appeal: "Let’s stick together to grow our economies. Let’s stick together to make Britain China’s best partner in the West. Let’s stick together and create a golden decade for both of our countries. Britain and China: we’ll stick together.”

The enthusiastic rhetoric reached new heights when Britain rolled out its red carpet for Xi Jinping in a lavish four-day state visit in October. Deals worth up to £40 billion were announced, Xi Jinping and his wife visited the queen, and the UK and China announced a global comprehensive strategic partnership

That friendship included some troubling detentions in London during Xi’s October 2015 visit: two Tibetan women were detained for waving small Tibetan flags and a former Tiananmen activist, Dr. Shao Zhang, who had been granted political asylum in the UK was arrested for alleged breach of the peace and later charged with conspiracy to commit a public order act. This more serious charge gave the police powers to search his home. All charges against Dr. Shao Zhang were later dropped and an investigation by the Independent Office for Police Conduct (IOPC) revealed that his arrest was the result of Chinese pressure to ensure that Xi Jinping suffered no “embarrassment” during his visit. Home Office officials had also made “unusual requests” to the police about the visit, an intervention that one police officer described as “unprecedented” and that had contributed to Shao’s arrest for conspiracy. The report had concluded in 2018 that police officers had a case to answer for gross misconduct. No officer was ever charged.

“They were very rude to the ambassador,” said her Majesty, sympathetically.

 

A rare glimpse behind the official curtain of enthusiasm was afforded by a conversation between Queen Elizabeth 11 and Commander Lucy D’Orsi, who had been in charge of security tor the Chinese state visit. The exchange was captured at a royal garden party, when D’Orsi described to the queen how Chinese officials had stormed out of a meeting with herself and the British ambassador to China, Barbara Woodward, threatening to call off the visit.  

“They were very rude to the ambassador,” said her Majesty, sympathetically.

The sovereign’s unguarded remarks were in contrast to the enthusiasm of the prime minister for George Osborne’s Golden Era of UK-China relations. Reality, however, never quite caught up with the extravagant promises. Seen from Beijing, the UK was at best a second-tier partner, on a level with Australia or Vietnam. In Europe, Germany, China’s key partner, exported four times as much to China as the UK and imported twice as much. More importantly, Germany’s position in the EU guaranteed China’s attention. France, not to be outdone, had begun a strategic dialogue with China in 2001 and raised its relationship to a global strategic partnership back in 2004, more than a decade before the UK. 

Nor is it obvious, despite the rhetoric, that UK government effort substantially changed business outcomes. In  2010, the UK and China promised to increase bilateral trade,  which at the time stood at $70 billion per annum, to $100 billion by 2015. In fact it rose by only 30 percent. In the previous five years, however, with less official attention, it had grown by more than 130 percent.   

Britain came late to the game, but once on the field it strove to be significant, and in the era of Made in China 2025, the UK’s advanced technologies, and its open economy held some interest for China. Equally important was the UK’s new enthusiasm for China’s global position and the Belt and Road Initiative in particular. When, in 2015, China launched its first multilateral bank, the Asian Infrastructure Investment Bank, the UK disregarded Washington’s disapproval and became the first OECD country to sign up. 

The Gild Comes Off the “Golden Era”

In retrospect, that busy year of 2015 may have been the highpoint of the “Golden Era.” The following year, David Cameron abruptly resigned after the referendum that he had called on British membership of the EU returned its result — one that Cameron had neither anticipated nor supported. Under his successor Theresa May, whose premiership was to be blighted by the fallout from that referendum, UK China relations cooled substantially.

The first shock came in October 2016 and concerned one of Cameron’s signature projects – Chinese involvement in the proposed nuclear power plant, Hinkley Point 2, scheduled to be built in the English county of Somerset. 

The project had a troubled background. Much of the UK’s ageing nuclear fleet is due for retirement in the 2020s and the Labour prime minister Tony Blair had decided that it should be replaced, over the objections of those who argued that Britain no longer needed nuclear power. Bidding opened as the global financial crisis hit and the bidders were few.

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A view of the Hinkley Point A nuclear power plant in 2014, with heaps in the foreground standing on the proposed site of Hinkley Point C. Image by Reading Tom posted to Flickr.com under CC license.

The contract was awarded to the French state owned company, EDF who proposed to build its own design EPR reactor,  a model that has never been successfully completed and that has a history of cost overruns and delays that stretches from Finland to China and over many years.

Originally scheduled for completion in 2023, the Hinkley Point project will be expensive for British consumers who will be obliged under the contract to pay £95 (at current prices) per MWh for 35 years, substantially more than the IEA projected costs for nuclear power of just £40 per MWH

In July 2015, an alarmed Lord Howell, former energy minister and, as it happens, father-in-law to George Osborne, described Hinkley Point C as “one of the worst deals ever for British households and British industry.” He said, furthermore, that “the component suppliers to EDF are in trouble, costs keep rising, no reactor of this kind has ever been completed successfully, those that are being built are years behind and workers at the site have been laid off.” He would shed no tears, he said, if the project were abandoned. 

EDF had begun a similar reactor in Flamanville in Normandy in 2006 with a price tag of 3.2 billion euros and a completion date of 2012. The latest estimate for its completion is 2022 and the price has risen to more than 12 billion euros. The troubles in Flamanville and other projects had left EDF in serious financial difficulties. Since the UK was scheduled to shut down both its old coal plants and old nuclear plants, and the Cameron government had cut investment in renewables, they were alarmed by the possibility that EDF’s troubles might mean that Hinkley might not be built and worried about keeping the UK’s lights on.

That created the opportunity for China. In September 2015, George Osborne announced the completion of a deal negotiated during Li Keqiang’s visit: China  agreed to finance one third of Hinkley’s costs, in return for a promise that China would then be allowed to built and operate its own design nuclear plants in Britain.   

By July 2016, Cameron was gone but the project was just getting started. That month, a party was planned at the site to celebrate the signing ceremony. The Chinese delegation had flown in, the champagne was on ice. But on the eve of the party, the UK government suddenly announced a delay, on the orders of the new prime minister, Theresa May. Hinkley Point C was again under review. 

 Mrs. May had never been a noted enthusiast for Hinkley or for China, but the timing of the announcement was nevertheless a shock. The Daily Telegraph, a right-wing British daily that has a lucrative partnership with China Daily published a stern op-ed signed by the Chinese ambassador to London, Liu Xiaoming, a man noted for his willingness to issue public reprimands to his British hosts, warning that delay to the project would damage “mutual trust” between the two nations. By mid September, the UK had bowed to pressure: Hinkley was to go ahead, but the episode had tarnished the gilding on the UK China relationship. Theresa May’s visit to China in February 2018 was decidedly low key. 

China had suggested, prior to the referendum, that its relationship with the UK would benefit from the UK staying in the EU. It is likely that China judges that Britain will now be a diminished partner.\

Concerns about Hinkley Point C touched on what was to become a recurring theme in the debate about the UK’s future relationships, a debate that had been complicated by the election of Donald Trump to the US presidency in 2016. Trump had campaigned on a strong anti-China ticket, periodically accusing China of “raping” the United States. Whilst this was not unusual for a US politician, Trump was to carry his rhetoric of resentment and hostility forward into policy. 

China had suggested, prior to the referendum, that its relationship with the UK would benefit from the UK staying in the EU. It is likely that China judges that Britain will now be a diminished partner.

 

There was little resistance in the US to a changing US approach to China. By 2016 concerns about the direction China was taking were bipartisan. Xi Jinping had thrown China’s cautious liberalization into reverse and pursued a more assertive overseas policy, including in the South China Sea. China was embracing advanced technologies and modernizing its armed forces, whilst showing no sign of abandoning its Leninist principles or an industrial policy that allowed its major firms to undercut international competitors on price. 

China’s practices had already entangled the UK in a relationship that was to become emblematic of Western security concerns about the China relationship. In 2003, Tony Blair, then prime minister, had ordered BT (British Telecom) to upgrade Britain’s creaking telecoms infrastructure. When the bids came in for transmission equipment,  the Chinese firm Huawei was the cheapest by quite a wide margin. When BT asked the government whether there were any concerns about Huawei supplying stitching gear for the network, they received no answer. By the time the security services flagged up their concerns, the deal was done.

Belatedly the UK attempted to close the security gap. A system was set up to monitor Huawei equipment and code, with a brief to look for anything untoward that might indicate a nefarious purpose. The Huawei Cyber Security Evaluation Centre (HCSEC, also known as the “Cell”) is a joint initiative with Huawei and operates under the HCSEC Oversight Board, established in 2014 and chaired by the CEO of the UK’s National Cyber Security Centre (NCSC).  

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Huawei at the Mobile World Congress in Spain in 2015. Image by Kārlis Dambrāns posted to Flickr.com under CC license.

To date, no back doors have been discovered, but in its 2018 report the National Cyber Security Centre (NCSC) entered a strong complaint about Huawei’s sub-standard software and poor version control that created important security vulnerabilities. In 2013 the Intelligence and Security Committee, in a report on the episode, concluded that “the process for considering national security issues at that time was insufficiently robust.”

 By 2019, UK telecoms providers were inviting bids for the country’s 5G infrastructure. In the intervening years, Huawei had become one of the world’s biggest suppliers of telecoms equipment, but also one of the most contentious. Australia had banned Huawei equipment entirely, the US has banned it from 5G networks, and Huawei’s COO, Meng Wanzhou, the daughter of the founder, had been detained in Canada pending extradition hearings that could have her sent for trial in the United States on charges of sanctions busting. If Huawei equipment had been purchased in 2003 in a moment of inattention, there was no doubt now that whatever decision was taken, it would been taken in the spotlight of competing concerns. To exclude Huawei would offend China, but to include it would enrage the United States. 

As successive UK governments hesitated, criticism of China in the UK gathered pace. A report from the influential Foreign Affairs Select Committee examined China’s role in a rules based order and looked at, among other issues, Huawei and the UK’s planned 5G infrastructure.

There was disagreement within the security services on the severity of the threat, but as Alex Younger, the Chief of the UK Secret Intelligence Service (MI6), said in public remarks in December 2018: “We need to decide the extent to which we are going to be comfortable with Chinese ownership of these technologies and these platforms in an environment where some of our allies have taken quite a definite position.”

The defense secretary himself expressed his “very deep concerns” about Huawei’s involvement in the UK’s 5G upgrade and the report noted that Australia and New Zealand, close intelligence partners of the UK, had effectively banned both Huawei and ZTE from participation. The US had banned both companies and in February 2019, US Secretary of State Mike Pompeo issued a reminder that the United States wanted countries to “understand the risks of putting this Huawei technology into their IT systems,” risks that included a possible end to intelligence sharing.  

It was clear the UK did not regard Huawei as a trusted vendor and anticipated that the Chinese government or its agencies would at some point launch a cyber attack on the UK. Given that Huawei equipment was already in the network, the UK’s approach to Huawei’s involvement in telecoms infrastructure was of necessity based on risk management and mitigation.

The NCSC’s Technical Director, Ian Levy, recently wrote that the government “assumed in the decision process that the Chinese state . . . . could compel anyone in China to do anything (which they’ve now codified in their National Intelligence Law) [and] would carry out cyber attacks against the UK at some point.” The Foreign Affairs Committee advised:

As concerns grow about the long-term strategic intentions of the Chinese state, so should the Government’s caution about the involvement of Chinese companies in any aspect of UK critical national infrastructure, including telecommunications. The debate over Huawei, which combines complex technological issues with sensitive geopolitical concerns, is a perfect example of the need for a clear national strategy towards China.

Separately, the UK Department for Digital, Media, Culture and Sport was looking at telecoms supply chains and preparing criteria for selecting providers for the UK’s 5G network. The influential security think tank the Royal United Services Institute published a report on how China was exerting both overt and covert influence in Britain, concluding that China was exercising influence in the UK in pursuit of its strategic objectives. Finally, in January 2020, the government announced that Huawei would be permitted a limited participation in the 5G network, but would be excluded on security grounds from those parts of it that the British regarded as core.

It was not a distinction that the United States recognized and the decision, which came after a further bout of intense lobbying by senior US officials, reportedly enraged the president. Trump had previously called Boris Johnson the “UK Trump” — surely the highest praise in the president’s lexicon. But the Huawei decision prompted a furious transatlantic phone call which Trump reportedly ended by slamming down the phone. 

There was open concern, too, on the Conservative benches of the House of Commons. In February a group of former Tory ministers wrote to the prime minister urging him to reconsider his decision and to set a target of zero for Huawei’s share of UK telecoms infrastructure, and a timeline to achieve it. The government should contract trusted vendors, they wrote, which they defined as companies from countries that have fair market competition, rule of law, respect human rights, data privacy and non-coercive government agencies.”  In April the stakes were raised again when a number of Conservative politicians announced the formation of the China Research Group, chaired by Tom Tugenhadt MP, who also chairs the House of Commons Foreign Affairs Committee and who has been amongst the party’s more prominent critics of  Xi Jinping’s China. The group described its purpose as “reshaping” the UK’s policy on China.

The UK security services, however, had been worried that excluding Huawei left a choice of only two vendors, Eriksson and Nokia, both of which had supply chains in China. Whilst agreeing that Huawei was not a trusted vendor, they sought to persuade the UK government that the longer term solution — building new and trusted capacity in industrial telecoms — was a better option than banning Huawei entirely.

The debate over the Huawei decision continues as the pandemic has led to a hardening of sentiment against China. In May, the prime minister Boris Johnson gave into pressure from his own party when he announced that Huawei’s involvement in UK telecoms would be further reduced, with the intention of eliminating it altogether by 2030.  

The Huawei decision serves as a pointer to future dilemmas for the UK. A post-Brexit UK will have to decide how robust its commitment to a rules based order really is. That includes renewed global concerns over Hong Kong and Xinjiang, as well as freedom of navigation in the South China Sea. In 2020, the UK government was hoping to persuade China to raise its climate ambitions in advance of the now postponed COP26, which the UK is hosting, and to take robust leadership on biodiversity for the conference that China was planning to host in Kunming in November, a conference that is now postponed in light of the global pandemic. But the government’s overarching concern will remain how to navigate a course between two increasingly hostile superpowers. As the African saying has it: When elephants fight, the grass is trampled.”

 

Rebalancing EU-China Relations

This series explores the shifting strategic debate in the European Union and various member states over the economic and political relationship with China. 

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Stuck in the Middle

26. May 2020
Author
Isabel Hilton

Isabel Hilton is a London based writer and broadcaster. She is founder and editor of chinadialogue, an independent, non-profit organization based in London, Beijing and San Francisco.